Question

Reda Bhd is a company engaging in palm oil plantation which is based in Pahang. On 1
January 2010, the company acquired a factory building and a machine at a cost of
RM4,000,000 and RM800,000 respectively. The estimated useful life of the factory building
and the machine were as follows:
Factory building 50 years
Machine 20 years
Depreciation for all the assets is computed based on the straight-line method. The company
applied the revaluation model for all its property, plant and equipment. The followings are the
relevant information of the machine and the factory building.
Machine
On 30 November 2014, the operation manager of the company has proposed to the board of
directors, a new machine to replace the old machine. The new machine is equipped with the
latest technology which can increase the production capacity of the company. In line with this
decision, the company decided to conduct impairment test for the old machine.
As at 31 December 2014, Reda Bhd received a few offers from other factories to purchase
the available machine at RM500,000. Disposal cost for the machine is RM50,000. The value
in use is approximately RM750,000.
Factory building
At the end of 2016, the carrying value of the factory building was as follows:
RM
Net revalued amount as at 31 December 2014 4,500,000
Accumulated depreciation (From year 2015 to 2016) (200,000)
Impairment loss as at 31 December 2016 (600,000)
Carrying value as at 31 December 2016 3,700,000
The factory building was revalued on 31 December 2014 at RM4,500,000. During the year
2019, there were indications that the impairment loss recognised in 2016 may have been
reversed. The estimated recoverable amount is RM4,300,000.

Calculate the followings:
i. The impairment loss for the machine as at 31 December 2014.

ii. The amount of the reversal of impairment loss to be recognised in the Statement
of Profit or Loss for the factory building as at 31 December 2019. Show all
workings.

c. Prepare the journal entries to record the reversal of impairment loss for the factory
building as at 31 December 2019.

Answer 1

Note:- The following answer is based on the IFRS conventions of accounting and the answer may vary if some other GAAP is applies.

i. The impairment loss for the machine as at 31 December 2014.

Purchase Value Cost on 1 January, 2010 = 800,000

Less:- Accumulated Depreciation = 200,000 (800,000 / 20 Years * 5 years) [2010-2014 is 5 years]

Carrying Value = 600,000

Now we calculate the Recoverable amount of asset, which is higher of Fair Value less Cost of disposal and value in use.

Fair Value less cost to disposal = 500,000 - 50,000 = 450,000

Value in Use = 750,000

Hence, Recoverable amount of the machine asset = 750,000 (higher of the above two)

Since, the carrying value is lower than the recoverable amount, no impairment loss arises in this case.

ii. The amount of the reversal of impairment loss to be recognised in the Statement of Profit or Loss for the factory building as at 31 December 2019. Show all workings.

Original Annual Depreciation = 4,000,000 / 50 Years = 80,000

Recoverable value at end of 2019 = 4,300,000

Carrying value that would have been if no impairment loss was booked in 2016, = 4,300,000 - 300,000 = 4,000,000

Actual Carrying Value at the end of 2019 = 3,441,860

Hence, the maximum revesal of impairment loss = 4,000,000 - 3,441,860 = 558,140

Revaluation Gain = 4,300,000 - 4,000,000 = 300,000

c. Prepare the journal entries to record the reversal of impairment loss for the factory building as at 31 December 2019.

Building	300,000
Accumulated Depreciation	258,140
To Revaluation Reserve		558,140
(Because impairment loss was set off from revaluation reserve, reversal of impairment loss would also be accounted thereby.)
Building	300,000
To Revaluation Reserve		300,000
(Revaluation Gain in excess of 4,000,000)

The increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment loss shall not exceed the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset in prior years. Any increase in excess of this amount would be a revaluation and would be accounted for under the appropriate Standard.

A reversal of an impairment loss on a revalued asset is recognised in other comprehensive income and increases the revaluation surplus for that asset. However, to the extent that an impairment loss on the same revalued asset was previously recognised in profit or loss, a reversal of that impairment loss is also recognised in profit or loss.